By Paul Abelsky and Alex Nicholson
Oct. 29 (Bloomberg) -- Russia’s central bank cut its key interest rates to record lows in an effort to boost lending and help carry the commodity-reliant economy out of its worst slump since official records began more than a decade ago.
Bank Rossii lowered the refinancing rate to 9.5 percent from 10 percent and reduced the repurchase rate charged on central bank loans to 8.5 percent from 9 percent, effective from tomorrow. The bank has cut the rates eight times since April 24. It last lowered them by a half point on Sept. 29.
The decision was made “with the aim of additionally stimulating lending activity of the banking sector,” Bank Rossii said in a statement. “The central bank’s interest rate measures will create the conditions for further reducing the cost of credits for end borrowers.”
Previous cuts in the benchmarks have been slow to filter through to bank lending rates, hampering domestic demand and leaving companies short on credit needed to resume investment and hire workers. Businesses in the world’s biggest energy producer still lack funds to rebuild inventories and recover from last year’s slump in raw material demand. The economy shrank a record 10.9 percent in the second quarter and contracted a further 9.4 percent in the three months ended September.
The ruble maintained declines and was down 0.5 percent at 29.2924 against the dollar in Moscow. It was little changed against the euro at 43.1796.
‘Big Opportunity’
The current level of inflation and interest rates provides a “big opportunity” to cut rates further, Alexei Ulyukayev, first deputy chairman of the central bank, said in Moscow on Oct. 21. The regulator may lower rates below 9 percent in 2010, he added.
The cuts “so far have not lead to an increase in lending by banks or a comparable reduction in the interest rates on loans,” Audit Chamber head Sergei Stepashin said during parliamentary hearings last week.
Russia is the only member of the four so-called BRIC nations still cutting rates. India last cut its reverse repo and repo rates in April, China lowered its lending rate in December and Brazil hasn’t cut its overnight rate since July.
The government of Prime Minister Vladimir Putin expects the economy of the world’s biggest energy exporter to contract 6.8 percent in the second half and 8.5 percent in 2009 on average, after growth of 5.6 percent in 2008 and 8.1 percent the year before. Output will grow 1.6 percent next year and 3 percent in 2011, the government estimates.
Recovery Prospects
Recovery prospects still hinge on Russia’s financial system and a resumption of lending growth. Credit flows have faltered even after Bank Rossii cut rates as banks remain concerned that borrowers can’t service debt and as asset quality deteriorates. Overdue bank loans rose to 5.8 percent of total lending in August from 5.5 percent a month earlier. Average interest rates charged on corporate loans declined to 14.5 percent last month after growing to 15.1 percent in August.
“High risks and uncertainty” continue to stifle corporate lending, Putin said last week.
The severity of Russia’s economic decline has undercut demand and may bring the inflation rate this year below the government’s target for the second time in a decade. Consumer prices grew an annual 10.7 percent in September, compared with 15 percent the same month last year.
‘Favorable Conditions’
“The usual seasonal October acceleration in inflation may well be smoothed by consistent ruble strengthening in the foreign-currency market,” said Anton Nikitin, an analyst at Renaissance Capital in Moscow. Producer prices, budget spending and an increased money supply aren’t creating enough pressure to fuel inflation, he said. “These conditions remain favorable for loosening monetary policy as early as October.”
Consumer-price growth this year may be “a little more” than 8 percent, Putin said in St. Petersburg on Oct. 25. That would be the slowest annual average pace of inflation since records began after the collapse of the Soviet Union in 1991.
Slowing price growth marks a reversal for Russia, which is still haunted by inflation rates in excess of 100 percent endured after its 1998 default and in excess of 1,000 percent after it abandoned central planning for market prices in the early 1990s.
Ruble Strength
The ruble has gained this month to the strongest level against the dollar in more than three quarters. Against the central bank’s target currency basket, the ruble has appreciated to the highest level since the end of December.
Crude oil, Russia’s chief export, touched a one-year high of $82 a barrel on Oct. 21. Oil prices have gained almost 80 percent this year as a recovery in stock markets encouraged investors and after the sliding dollar boosted commodities purchases.
“A rate cut is likely not only in response to slowing inflation, but also as a further effort to curb the ruble’s rally,” said Vladimir Osakovsky, an economist at UniCredit SpA in Moscow. “Monetary easing should eventually reverse the national currency’s current rally.”
Putin said last month that preventing the appreciation of the ruble remains one of the government’s objectives. “The market sees no grounds for sharp foreign-exchange fluctuations or devaluation,” he said at an Oct. 16 government meeting.
Russia’s benchmark rate is Europe’s fourth-highest behind Iceland, Serbia and Ukraine. Eighteen of the 53 central banks tracked by Bloomberg eased monetary conditions in the past three months to fight the recession, including east European countries such as Hungary, Romania and the Czech Republic.
Russia’s rate cuts represent a reversal of last year’s tightening that had sought to prevent lenders using borrowed cash to speculate on the ruble’s decline after oil prices slumped.
To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.
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